Pension Funds and Real Estate
As the equity market continues to perform dismally, pension funds now plan to establish Real Estate Investment Trusts (REITs) to diversify their assets and increase returns. With the establishment of the REITs market, pension funds have the opportunity to invest in the State's affordable housing, green property, and infrastructure projects. Pensions are further intertwined in affordable housing by the role of its funds and administrators in relation to the Kenya National REIT (KNR).
Pensions are usually structured for long-term investments such as property and government bonds due to the lower risk involved, to ensure that retirees' savings remain protected from the volatility of shorter-term and higher-risk investment vehicles.
Current Regulatory Landscape
Regulations by the Retirement Benefits Authority (RBA) allow up to 30% of a fund's assets under management to be invested in REITs and 10% to be invested in infrastructure. However, in 2022, investment in REITs was at just 0.02%, representing Ksh 283 million, while the pension sector controlled Ksh 1.57 trillion in assets under management.
Investment in property by the pension industry was at 15.7% as of December 2022, with 13.6% of the funds in equities and 45.8% in government securities — the biggest asset class for pension funds.
However, with rising interest rates, bond valuations are declining. Furthermore, emerging and frontier markets such as Kenya are unable to match the returns from other markets such as the US, which offer higher rates and stability to investors amid uncertainty in global markets. This has put pension funds in a position to seek alternative investment vehicles such as REITs that provide less volatile and predictable returns.
Our View
Pension funds are expected to be major players in the REITs space going forward. This is further driven by the current government's push for affordable housing, targeting financial institutions such as pension funds for financing, as well as the use of REITs as a vehicle to actualize the program.
The affiliation towards REITs is attributed to compliance with the regulatory environment requiring 30% investment in immovable property, that is, real estate. REITs allow pension funds to invest in real estate through capital input while still maintaining the 30% real estate assets requirement as stipulated by the regulator.
Additionally, the stable nature of returns from REITs ensures retirees' interests are upheld, as REIT regulations dictate that REITs distribute 80% dividend payout to investors.
The pension industry has shown keen interest in the affordable housing program. As detailed in our previous blog on the use of REITs to boost affordable housing projects in Kenya, the funds may participate in the affordable housing program by listing REITs through Special Purpose Vehicles (SPVs), which will be aggregated to the Kenya National REIT (KNR).
Furthermore, pension funds will prospectively surrender 5% of their assets' investments — equivalent to Sh75 billion — as well as an additional 5% of REIT project allocations of a similar amount for the purpose of affordable housing.
However, this is subject to uncertainty on regulation, particularly on the aspect of the affordable housing program which is currently under deliberations throughout the country. This is illustrated by the court order that revoked the law allowing home buying with pension savings, which had been proposed to promote the housing program.
Source: Business Daily and Sterling Real Estate Advisory